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How can Egyptians reap fruits of economic reform?

Egypt embarked on a bold economic reform programme that included the pound flotation, a reduction in fuel and electricity subsidies, imposing taxes including the value-added tax (VAT), all with the aim of trimming the budget deficit.

Nihal Samir
September 9, 2019 Comments Off on How can Egyptians reap fruits of economic reform?

Egypt has finally successfully completed the three-year arrangement $12bn loan with the International Monetary Fund (IMF), in which the final disbursement was approved by the IMF’s executive board in late July.

In November 2016, the executive board of the IMF approved a $12bn loan as financial assistance to Egypt to support the Egyptian economic reform programme.

Egypt embarked on a bold economic reform programme that included the pound flotation, a reduction in fuel and electricity subsidies, imposing taxes including the value-added tax (VAT), all with the aim of trimming the budget deficit.

Maybe the programme achieved its key objectives of macroeconomic stability, but on the other hand the poverty rates increased, with 32.5% of the Egyptians living below the poverty line in 2017/18, compared to 27.8% in 2015, according to the expenditure and income research by the Central Agency for Public Mobilization and Statistics (CAPMAS).

So these risky indicators raised questions of when the normal citizen would reap the fruits of the economic reform programme and which procedures the government should take in order to make the citizens reap the benefits of the reforms. What are the sustainable growth rates that Egypt should achieve annually in order to make the people feel the positive effects in their salaries, decrease of prices, increasing the value purchasing power, etc?

Daily News Egypt (DNE) dug further in these questions, interviewing experts to learn their opinion. But let’s first see where Egypt`s economy stands after wrapping up the IMF programme.

Where does Egypt’s economy stand after the completion of the IMF programme?

Although there has been some debate regarding the specifics of how the reforms have been implemented and what might have been done differently to reduce the economic pressure on the population, there is broad agreement among economists that these reforms were necessary and that they have been very successful at improving the structural resilience and macro-economic stability of Egypt’s economy, Kevin Graham, Oxford Business Group’s Editorial Manager in Egypt told DNE.

Garbis Iradian, chief economist for MENA (Middle East and North Africa) at the Institute of International Finance (IIF) stated to DNE that he believes that the country is reaping the fruits of the three-year IMF programme.

“Growth is more than 5.5%, the unemployment rate has declined from 11.7% in FY 2016/17 to 8.7% in FY 2018/19, the twin deficits have narrowed, and the CPI inflation is falling,” Iradian said.

The performance of the Egyptian economy over the past two years was the best among MENA countries, he added.

Also Graham said that a number of macroeconomic indicators have improved since the start of the programme in 2016.

“The country met the IMF’s fiscal target of a primary surplus of 2% of GDP for FY 2018/19, while foreign exchange reserves reached an all-time high of $44.4bn by the end of June. Additionally, unemployment decreased to 8.1% in the first quarter of this year, the lowest rate in 20 years,” he further explained.

Also inflation has also fallen significantly, he said, from a high of around 35% in 1986 to a four-year low of 8.7% in July 2019. Of all emerging markets, Egyptian bonds are providing investors with the highest returns this year, at 25.9%

According to the IMF`s data, Egypt`s reform programme, supported by the IMF’s Extended Fund Facility (EFF), has made substantial progress as evident in the success achieved in macroeconomic stabilisation and the recovery of growth.

Furthermore, the IMF data show that Egypt`s economic growth has been steadily improving since the beginning of the reforms, and at 5.5% is among the highest in the region.

The IMF stated in its data report that there are considerable achievements including the fact that the budget for FY 2018/19 reached a primary surplus of 2% of the GDP, which excludes interest payments, and inflation is on track to reach single digits by the end of 2019.

In addition to that, unemployment has declined to around 8% in December 2018, which is the lowest in 20 years, and social protection measures have been expanded.

Why did poverty rates increase despite macro-economic stability?

It seems confusing that a country whose economic growth has accelerated, unemployment decreased, twin deficits narrowed, core inflation fallen, and public debt ratio is declining, has a hike in the poverty rates, and population that suffers.

It`s confusing as it is expected that the more the country`s economic situation improves, the less poverty spreads among its population.

Explaining this phenomenon, Gamal Bayoumi, former assistant minister of foreign affairs and secretary general of the Arab Investors Union, told DNE that the economic growth witnessed in Egypt is not enough in comparison with the growth in birth rate.

“Since 2011, the Egyptian population hiked by 22 million citizens, which is too large of an increase,” he said. So unfortunately, Egypt`s production is not keeping up with its population growth.

Gouda Abdel Khalek, economist and former minister of supply stated to DNE that the rapid population growth may be a cause of the high poverty rate, but it is not the main reason. The population growth rate in Egypt is 2.3% per year, while the rate of economic growth is 5.6%, which means that the average per capita income has increased, he explained.

He believes the problem is that the income increase of Egyptians is concentrated in high-income groups, which results in more income inequality.

The change in poverty rate in any country depends on two factors, Abdel Khalek said, which are the change in GDP growth rate, and the degree of equality in income distribution.

He explained that a higher income growth rate correspondents with a lower poverty rate, while on the contrary higher inequality in income distribution results in higher poverty rates.

Bayoumi said there are two categories in Egypt that enjoy the improved economic conditions: high-income and low-income people, as low-income groups benefited from the social programmes implemented by the Ministry of Social Solidarity.

“The only category that has not felt any improvement in economic conditions is the middle class, which includes employees, people who have fixed incomes, people who subsist on pensions,” Bayoumi said.

Graham referred to a statement published in April, in which the World Bank noted that the programme “took a toll on the middle class, who face some higher costs of living as a result of the reforms”.

“Average household income in 2018 stood at LE58,900 ($3550), down 20% compared to 2015 levels when adjusted for inflation,” said Graham.

“However, both the IMF and Hala El Saeed, the minister of planning, monitoring and administrative reform, argue that poverty rates would have been higher had the social elements of the loan package not been implemented,” he added.

These include the cash transfer programmeTakafulandKarama (“SolidarityandDignity”), which was significantly expanded from 200,000 to 2.3m households under the reforms, benefitting around 10m people.

Graham added however, that despite these positive results, the loans’ successes were not evenly distributed among the population.

“While significant progress has been made in structural reforms, more needs to be done to improve the business environment. Egypt’s ranking by the World Bank in ease of doing business is well below most emerging economies (including some economies in the region like Morocco and Turkey),” said economist Iradian.

What are the deeper reforms that the government should implement?

1- Inflation control

In Abdel Khalek`s opinion, the first thing the government should do, is to control inflation, explaining that the inflation is calculated random in the economy and the official figures don’t reflect real facts on the ground.

Inflation is considered a kind of tax, he said, but it is a tax without legislation, describing it as the worst of taxes. As an example Abdel Khalek said that normal kinds of taxes can be debated or discussed, while in the case of inflation people “sleep and wake up in the morning, finding out that they have just lost part of their income through the rising of prices”.

He added that it is also considered the worst of taxes as it is a regressive tax, which means that the burden of the tax falls more heavily on the poor strata of the population, and the lower parts of the middle class.

“So that’s the first priority for the government – to come to control the inflation,” Abdel Khalek reiterated.

2- Full mobilisation on economic reform programme

Bayoumi believes that the government has adopted a smart economic reform programme.

On the other hand, he thinks that the government needs to put effort in gaining the support of the population for the economic reform programme.

“We need to have a ministry for media that will help in mobilising the population on the economic reform programme, we need to see different ministers appear on television providing the population with information on the reform programme,” Bayoumi said.

3- Economic growth rate 3x birth growth rate

Egypt needs to achieve economic growth rates three times the growth in birth rate, Bayoumi added, saying that Egypt`s economy needs to grow by 6% on a continual basis.

If Egypt would achieve an annual growth of 6%, the economy could achieve sustainability within three years and subsequently the citizens will feel this growth, he said.

The IIF suggested in its latest report on Egypt that in order to improve the economic conditions in Egypt, the country needs to grow by 5-6% on a sustained basis and create more than 0.7 million new jobs annually to further reduce unemployment and bring down government debt relative to the GDP to more sustainable levels.

4- Job opportunities

Agreeing with the IFF, Bayoumi suggested that Egypt should increase the provision of job opportunities and reduce disguised unemployment which exists in both the government and the public sector. However this is something that “seems difficult” to implement, according to Bayoumi.

5- Fair income distribution

Abdel Khalek stated that fairer income distribution is highly needed in Egypt, explaining that fairness in income distribution equals less poverty.

6- Increase production

Meanwhile Bayoumi believes that the people should realise that the issue is not so much about wage increases, but it is more about increasing domestic production.

Also Abdel Khalek said Egypt should focus on ‘real’ production sectors, such as agriculture and industry, in order to create sustainable job opportunities.

“Unfortunately we depend on importing rather than producing,” Abdel Khalek said.

7- Implement reforms at sectoral level

“Broadly speaking though, with the goal of shifting the burden of economic growth and job creation to the private sector under way, the government can now move forward by implementing reforms at the sectoral level,” Graham said.

These reforms would increase long-term regulatory clarity within each sector for laws as well as executive regulations, he continued, improving bureaucratic efficiency through clarifying and streamlining processes, which may be aided by digitalisation.

“In turn, this will ensure fairness of competition among all market players including through increasing transparency of state-owned players and defining their areas of activity more clearly,” Graham added.

The editorial manager in of OBG Egypt further said that together with these reforms at the sectoral level, the steps that have already been taken to rationalise prices and spending, will ensure that investors see Egypt as more attractive in comparison to other possible investment destinations. When they do invest, they are targeting areas where there is real opportunity to create growth, as opposed to areas where they would need to rely on government support.

8- Rehabilitate agriculture infrastructure

Regarding the agricultural sector in Egypt, Abdel Khalek noted that the country imports about 50% of its food consumption, such as wheat and beans.

“There is no point for a country like Egypt to actually import more than 80% of its needs of beans, so I think we should improve our agriculture infrastructure and I have two suggestions in that point,” Abdel Khalek said.

Abdel Khalek’s first suggestion is to rehabilitate the infrastructure of agriculture and by that he means adopting a new irrigation system.

“After the construction of the high dam in Aswan, we started cultivating the same area of land more than once a year, on average two and a half times a year,” said Abdel Khalek. “It resulted in higher water levels and as a solution a system of cover irrigation was put in place [irrigation method by flooding the land]. We did this back in the early 70`s, that system is more than 40-years-old now,” he added.

Abdel Khalek believes that anyone who is familiar with the village life, would know that this cover irrigation system in Egypt is rotten, as too much water on the land can lead to a drop in production.

According to experts, implementing a new irrigation system in Egypt will take more than a couple of years, Abdel Khalek said, and through it the country can raise land productivity by about 20% to 30%.

9- Restoring crop rotation

Abdel Khalek revisited the early 1990`s, explaining that since that period Egypt followed the advice of the Americans to abolish crop rotation in agriculture. The justification at that time was predominantly not to be intrusive and let the farmers decide for themselves.

Notably, crop rotation is the practice of growing a series of dissimilar or different types of crops in the same area in sequenced seasons. It is done so that the soil of farms is not used for only one set of nutrients. It helps in reducing soil erosion and increases soil fertility and crop yield.

“In a country of a dry agriculture like the American Midwest, the crop rotation could be perceived as an intrusion on the right of the farmer to set for himself, but in a country like Egypt that has water, and the crops depends on water not on rain, this is not true,” according to Abdel Khalek.

In Abdel Khalek’s opinion, it is essential for Egypt`s agriculture system to go back to crop rotation.

10- Export more

Former executive director at the Egyptian Center for Economic Studies (ECES), Sherif El-Diwany, believes that the only way for any country to improve the living standard for its citizens, is to depend on exporting.

“I think Egypt must start to create a new productive and export wealth,” El-Diwany told DNE.

El-Diwany reckons that Egypt is not exporting enough, noting that the WB Doing Business report indicated that the cross-border trade index for Egypt is very negative.

He recommended that for Egypt to improve, it needs to facilitate and hasten the trade movement in and out of the country including customs and border control, etc.

El-Diwany proposed opening untraditional exporting sectors, noting that Egypt exports well in the garments sector and the food industry.

“Meanwhile, we need to see the promising sectors, that receive high demand from the world and start to produce and export them, for example the chemical industries, engineering industries, and technology,” El-Diwany offered a suggestion.

11- Reconsider new foreign trade policy

Furthermore, El-Diwany clarified that Egypt has been adopting years ago the foreign trade policy of protecting the local industry through putting many restrictions on importing and limiting it.

He continued that this policy should be changed, marking the trade freedom and competition as the base of the new policy.

El-Diwany recommended that the new policy should also focus on exporting, mentioning that the policy adopted by the government is to limit exports and encourage local industry to cover the local market.

“Through exporting the investors would prefer to come to Egypt and open factories in Egypt, which will subsequently create more employment opportunities, and also through exporting the living standard for citizens will increase, making the people feel that the economic conditions improved,” he asserted.

Notably, Egypt has allocated EGP 6bn in the budget of the fiscal year (FY) 2019/20 to stimulate exports through a new programme aiming to solve the challenges faced by Egyptian exporters, according to Minister of Finance Mohamed Moeit.

“The programme of stimulation of exports is not enough, the result will be better if we try to facilitate the trade movement from in and out the country with less cost, in addition to direct our focus on exporting, in order to attract investors,” El-Diwany said.

12- From free to regulated market economy

According to Abdel Khalek the government`s programme is based on adopting a free market economy.

“So now, I would like to emphasise as an economist that nowhere in the world, the so called free market economy is actually applied, even in the United States which is the ultimate example of a capitalist economy, they apply rules. One of such rules is combating monopoly and ensuring competition,” Abdel Khalek said.

He depicted that a monopoly occurs when a producer fully controls the supply of an important commodity. Talking about the steel industry in Egypt, Abdel Khalek said one specific local company monopolised steel production. And on the cement industry, he claimed that some foreigners are controlling cement production in Egypt.

Egypt needs to ruin monopolies and ensure competition, Abdel Khalek added, saying that by reading carefully the law of protecting competition and preventing monopolistic practices dating back to 1995, he found that it encourages monopolistic practices.

He explained that the law stated that the producer can control as much as 65% of the market without causing any problem, adding that the 65% is considered a huge percentage when it comes to a market share.

Meanwhile, he said that the penalty involved for the monopolistic practices, is in a form of a sum of money, depending on the extent of the monopolistic act.

“As you know, we have one of the highest inflation rates in the world. So, the penalty of let`s say EGP 100 from 10 years ago, is worth nothing today, and that’s the idea,” he explained.

He concluded that in the aforementioned case, producers monopolise certain activities, and profiteer out of it to make hundreds of millions, and will end up paying a lump sum, which loses its value as time goes by.

Abdel Khalek suggested that Egypt has to change the law, following the example of other countries, making the fine or the penalty proportional to the amount that the producer gained from exercising the monopolistic power, to discourage him from conducting any monopolistic acts again.

“In addition, we could apply a criminal penalty, as well the fine penalty like in Japan,” he added.

Furthermore, Abdel Khalek suggested that the government should rethink the issue of the monopoly of some multinational company suppliers of commodities in Egypt.

The government now follows the formula of private public partnership with multinational corporations, with the aim of making basic consumer goods available to the public at low prices.

“There is no problem to have the private sector doing anything but according to a regulating market economy, not a free market economy, so the government should play an effective role in regulating the market,” he concluded.

13- Less bureaucracy and red tape

Iradian stated that there is a need for less bureaucracy and red tape, explaining that by improving the business environment, more FDI could flow to the non-energy sector, including manufacturing, healthcare, and consumer goods.

“Decisive actions to enhance governance and rule of law would help reduce corruption and improve access to land for new projects, which in turn would promote fair competition and private sector growth,” Iradian asserted.

Finally, Oxford Business Group’s Kevin Graham said that the next step for Egypt is to build on existing achievements by moving ahead with further sectoral forms to ensure a level field of competition for businesses of all sizes.

“This should improve business leaders’ ability to forecast economic growth over the medium term and, consequently, make firm investment plans. A business environment that continues to improve in these areas will encourage the necessary private sector investment and boost job creation for the population to feel the benefits of the entire reform project.” he said.

Finally, Iradian said that overall he is optimistic about the economic prospects in Egypt.